April 11 (Bloomberg) -- Here’s a surprise: The budget proposed by President Barack Obama and the one by House Budget Committee Chairman Paul Ryan aren’t as far apart as you might think.
Let us stipulate that Ryan’s budget includes more deficit reduction, larger tax cuts and higher defense spending, and is paid for with big cuts in domestic discretionary programs. In contrast, Obama offers somewhat less deficit reduction, less defense spending, significantly higher taxes on the rich and smaller cuts to programs for the poor.
But clear that away (and clear away the election-year demagoguery while you’re at it), and the 10-year numbers tell a more interesting story. According to the Congressional Budget Office, the 2022 deficit under Obama’s plan would be about 3 percent of gross domestic product, down from about 8.1 percent this year. Ryan would bring the deficit to 1.25 percent of GDP by 2023.
Obama would bump tax revenue to 19.8 percent of GDP, up from 15.5 percent now, mostly by letting the Bush tax cuts expire on upper-income households. Ryan would extend all the Bush tax cuts and reduce the number of tax brackets from six to two -- 25 percent and 10 percent. Still, revenue under his plan would rise to 18.75 percent of the economy, more than the historical average of 18 percent.
Both budgets rebalance spending on health care. Obama, through his health-care reform law, establishes state-based exchanges for insurance plans that compete for the business of individuals and small-business owners, some of whom get a premium subsidy. Ryan, a Wisconsin Republican, would ditch the Affordable Care Act, but establish exchanges in which health plans compete for the business of Medicare-eligible seniors, who get a premium subsidy.
It’s not hard to see the compromise: Competitive exchanges under which health plans market themselves to one and all, with the government setting minimum coverage standards and offering subsidies to the poor, disabled and elderly.
Obama and Ryan would also rebalance spending away from the rich and toward lower-income earners. Obama uses his “Buffett Rule,” which would push up tax rates on households with incomes of more than $1 million. Ryan would recover some of the $10 trillion in lost revenue over the next decade (the cost of extending the Bush tax cuts and lowering the top tax bracket to 25 percent) by cutting tax breaks for the wealthy. He would mostly target so-called tax expenditures, the popular deductions taken for mortgage interest, charitable contributions, state and local taxes, and employer-provided health benefits.
Ryan has declined to offer specifics, but in an April 10 meeting with the Bloomberg View editorial board, he said he would “income-adjust entitlement programs” and “circumscribe” tax expenditures for the wealthy. In plain English, that translates to means-testing Medicare and Social Security so the rich lose some benefits and the poor get more. It also means not letting the wealthy take full advantage of tax breaks like the mortgage-interest deduction.
It’s an idea he and Obama already agree on. For years, Obama has sought to limit the benefit of tax expenditures for the wealthy to the value that those breaks have for people in the 28 percent tax bracket. Lawmakers in both parties have never given the concept, modest as it is, serious consideration. They should.
Outlier on Taxes
The blueprint by Ryan, which has the strong support of Republican presidential frontrunner Mitt Romney, is roughly in line with the Simpson-Bowles plan and the one developed by Alice Rivlin, a budget director under President Bill Clinton. Both of these proposed to lower the top individual income-tax rate from today’s 35 percent. The outlier on taxes is Obama, who would push the top federal bracket to about 40 percent.
That’s not to say Ryan’s budget is flawless. The Center on Budget and Policy Priorities estimates that 62 percent of his cuts would come from programs for low-income Americans (too much) and 37 percent of the tax benefits would go to those earning more than $1 million (also too much). The Tax Policy Center found that cutting tax expenditures (not including investment income like capital gains and dividends) almost in half would generate just $2.6 trillion over a decade, far less than the $10 trillion Ryan needs. Moreover, the study found that middle-income taxpayers would be hit slightly harder than those in the top 1 percent. Clearly, Ryan has more work to do.
Obama’s budget is also flawed, for different reasons. The president claims he would achieve $4.3 trillion in savings through 2021, slightly more than the Simpson-Bowles commission’s $4 trillion -- the national benchmark. But he counts $1.6 trillion of already enacted savings; $740 billion from the drawdown of the wars in Iraq and Afghanistan; and $830 billion from letting the Bush tax cuts expire for upper-income taxpayers. The Simpson-Bowles plan didn’t rely on such gimmicks to get to $4 trillion. Clearly, Obama also has more work to do.
Recent news stories reveal that Obama and House Speaker John Boehner got about 80 percent of the way toward a grand deficit-cutting bargain in last summer’s secret debt-ceiling negotiations. The last 20 percent shouldn’t be insurmountable. It could be a blend of Obama’s and Ryan’s plans to limit tax expenditures for the rich. If they taxed capital gains and dividends as ordinary income, they could pull in trillions more in revenue over the decade. Lowering the top tax rate, perhaps to 30 percent, would probably produce more revenue than it would lose because the rich pay, on average, substantially less than that now.
A new bargain could include means-testing entitlements. And it should include competitive health-insurance exchanges for seniors, much like those for uninsured individuals and small businesses under Obama’s health-care reform law.
Compromises like these would allow Republicans to claim they lowered tax rates and spending on entitlements. Democrats would be able to say they preserved Medicare and social programs for the poor. Americans would get less debt and an end to the incessant pettifoggery over federal budgets. Who’s not for that?
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